From the beginning of the Financial Year (FY) 2016-17, equity markets have rallied ferociously. CNX Nifty has generated 12.8% returns, while CNX 500 has yielded 16.8% so far. As per the NSDL record Foreign Institutional Investors (FIIs) have poured in Rs 48,243 into the India markets. Domestic Institutional Investors (DIIs) have also maintained their bullish stance on Indian markets. At Rs 16.11 lakh crore, primarily led by incremental investments in equity schemes, Assets Under Management (AUM) of mutual fund houses touched an all-time high in the Q2, FY 2016-17. While this all may sound hunky dory, the fact is, equity markets are losing steam in India. Key market indices are struggling now. Nifty 50 has been finding it difficult to inch higher. And in the absence of robust growth in corporate earnings, markets now look dangerously poised.
Expensive market valuation…
Data as on October 07, 2016
(Source: NSE, PersonalFN Research)
The chart above makes it clear that broader markets are doing a lot better than the front-line stocks, but this enthusiasm is unfounded as valuations in the midcap space have become extremely expensive. Those in the largecap segment are not cheap either. Optimism is rising, indices are rising, investments are rising, but earnings have stayed persistently low. Can Q2 be an exception?
Going by the broader market estimates and the recent account of developments, healthy growth in corporate profit is still a pipedream. The rally so far has happened on account of two factors—ample liquidity in the global system and the expectation of a sustained recovery in economic growth. Liquidity still remains very strong, despite the odds remaining in favour of Federal Reserve (Fed) raising interest rates; but valuations are likely to become a drag unless corporate earnings grow now.
As per the estimates of various brokerage houses and market participants, total sales of Nifty companies are likely to increase by 3.3%, and close to 67% of Nifty companies are expected to record a net profit growth of 3.1%. Having said that, the combined growth in the net profit of non-financial nifty constituents is likely to improve considerably from 0.7% in Q1 to 10.3% in Q2. This suggests that banks are likely to fare worse than other Nifty companies. Broader markets are expected to record a faster growth. Auto and cement companies are expected to perform well but banks, Consumer Non-durables, oil producing companies are likely to report weak earnings. On the other hand, auto, cement and oil marketing companies may do well.
It seems, the markets have been expecting growth in corporate profits to be in the range of 15%-18%; unless companies beat these estimates, the gap between the fundamentals and valuations is likely to widen. This may put more stress on midcaps as many of them are in a bubble territory.
PersonalFN is of the view that, disappointing earnings may drag markets substantially. Those investing directly in stocks should assess growth prospects of the companies but also pay attention to the valuations. Mutual fund investors should avoid investing in schemes following the market momentum. Those who have put in place sound investment and risk management systems and processes appear to be in a better position to deal with the difficult market conditions. Opting for Systematic Investment Plans (SIPs) may pay off.
If you are unsure of which funds to bet on, you may try out the unbiased mutual fund research services.
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